Political institutions and debt crises

This paper shows that political institutions matter in explaining defaults on external and domestic debt obligations. We explore a large number of political and macroeconomic variables using a non-parametric technique to predict safety from default. The advantage of this technique is that it is able to identify patterns in the data that are not captured in standard probit analysis. We find that political factors matter, and do so in different ways for democratic and non-democratic regimes, and for domestic and external debt. In democracies, a parliamentary system or sufficient checks and balances almost guarantee the absence of default on external debt when economic fundamentals or liquidity are sufficiently strong. In dictatorships, high stability and tenure play a similar role for default on domestic debt.     

Informal institutions rule: institutional arrangements and economic performance

Institutions are widely believed to be important for economic development. This paper attempts to contribute to our understanding of how institutions matter by examining the effect of formal and informal institutional arrangements on economic progress. Formal institutions represent government defined and enforced constraints while informal institutions capture private constraints. The findings suggest that the presence of informal institutions is a strong determinant of development. In contrast, formal institutions are only successful when embedded in informal constraints, and codifying informal rules can lead to negative unintended consequences. This suggests that institutions cannot be easily transplanted in order to spur economic development.     

Democracy and the quality of economic institutions: theory and evidence

Public Choice - We present a simple model, illustrating how democracy may improve the quality of the economic institutions. The model further suggests that institutional quality varies more across...     

Political economy of FDI and economic growth in China: A longitudinal test at provincial level

This study asks two central questions: (1) how we can explain the dynamic relationships between economic growth and FDI distributions at national and regional levels; (2) what determines Chinese rapid economic growth and unprecedented volume of FDI at national and regional levels. Two empirical models are developed to test the two main hypotheses of FDI-led growth model and growth-driven FDI model based on time-series and cross-provincial data of 174 observations (29 provinces for 6 years, 1995–2000). The results confirm main findings of earlier studies on the links between FDI and economic growth in China, but disapprove the impact of human capital, historical, and geographical conditions on FDI distributions in the regions during the research period.     

Political institutions and Central Bank independence: A cross-country analysis

Using three quantitative measures of Central Bank independence, we apply OLS and TSLS regression methods to investigate the possible correlation between political liberty, political instability and central bank independence. For a sample of Western democracies and highly democratic developing countries we show that Cukierman's legal independence index is positively correlated with political freedom and regime political stability. It is negatively correlated with party political stability. For a sample of developing countries that excludes dictatorships we show that a special index of legal central bank autonomy is positively associated with political freedom and political stability. Finally, we observe that, for the same sample of nations, the turnover index of central bank independence is not sensitive to our political variables.     

Political institutions and sovereign borrowing: evidence from nineteenth-century Argentina

I study the relationship between political institutions and sovereign borrowing when constitutional constraints are systematically chosen to obtain better credit conditions. I argue that the impact of institutional constraints on country risk premia depends on the government’s concern with the country’s creditworthiness and its “willingness to repay”; two variables that are hardly observable. To properly evaluate the relationship between political institutions and sovereign borrowing, I focus on the link between institutional constraints and the risk premia of Argentine bonds between 1822 and 1913. Specifically, I analyze whether a “structural break” in the government’s cost of borrowing time-series exists. I use the Perron-Volesang test for structural change with unknown break dates. The statistical analysis indicates that the adoption of institutional constraints led to significant improvements in borrowing terms: the series has a single structural change; and the distinctive break point is associated with the country’s adoption of constitutional checks and balances. Time-series regressions and instrumental variables (IV) estimation reinforce these findings.     

The evolution of economic institutions as a propagation process

Based on some notions from recent game theoretic approaches to explain the emergence of institutions, a model is put forward which implies some generalizations and extensions. First, the evolution of institutions is interpreted as a diffusion process. This interpretation provides a general formal framework to cover both, the case of strategic and that of non-strategic interaction. Second, different forms of interdependency effects between the individuals involved are identified as making the crucial difference between the case where institutions emerge spontaneously in an unorganized form and the case where they do not.     

Social choice and economic growth

Optimal economic growth deals with the problem of how societies make tradeoffs between current and future consumption, or equivalently, how societies make decisions about investment rates. Until now, theorists have simply assumed that there is some societal utility function which planners can maximize. Social choice theorists have thrown doubt upon the concept of a societal utility function. We treat optimal economic growth as a problem in social choice theory. Assume that citizens have preferences over the various growth plans. Under what conditions will a majority rule equilibrium exist? We show that such an equilibrium can exist for a Ramsey type problem. We then briefly consider social choice in the so-called “labor surplus” economy.     

Colonial legacies and economic growth

Much of the work on colonialism has been theoretical or anecdotal. In this paper, I close the gap between the literature on development and new growth theory by testing the effect of colonization on subsequent growth and development. In a sample of 63 ex-colonial states from 1961-1990, I find that colonies that were held for longer periods of time than other countries tend to perform better, on average, after independence. Finally, I show that the level of education at the time of independence can help to explain much of the development gap between the former British and French colonies in Africa.     

Institutional technology and economic growth

An endogenous model of constitutional changes and economic growth links the temporal decline in private market returns when technology is constant with the returns to rule changes realized in a political market. There is a steady state constitutional setting in which all rule changes have been incorporated that is analytically equivalent to the neoclassical steady state. As in the neoclassical model, private-sector technological progress postpones the steady state. To the extent the original constitutional setting promotes innovation, the evolutionary process toward the steady state is delayed. The model yields a theory of revolution based on forces leading to the adoption of inefficient changes in the constitutional setting.     

Channeling frustrations: institutions, economic fluctuations, and political behavior

While the literature suggests that clear lines of responsibility lead to greater incumbent dependence on economic conditions for support, little has been said about how electorates channel frustrations in systems characterized by 'fuzzy' lines of responsibility, i.e., the shape and status of parliamentary government in relation to possible choice of electors open to them. The argument presented here is that fuzzy lines of responsibility result in lower incentives to participate in political processes and greater system dissatisfaction given economic circumstances. This decline is greater in systems in which incumbent responsibility is less easily identified by the individual citizen. To test this, data are collected from eight European nations over the period 1975–1992. Split sample and slope intervention models with robust estimation are employed at the individual level. System level aggregates are analyzed using pooled time–series analysis to confirm individual level findings. Finally, election turnout data are also analyzed to obtain election level verification of survey findings. Evidence suggests that participation is more heavily influenced by economic conditions in fuzzy settings. Coupled with existing literature, this suggests that while clear settings encourage punishment of the incumbent unclear settings tend to cause individuals to become more withdrawn and alienated. However, economic conditions are also important to overall system effects. The findings herein suggest that unclear or fuzzy settings increase the role of economic conditions in determination of system affect.     

Political institutions and academic freedom: evidence from across the world

Public Choice - There is scant systematic empirical evidence on what explains variation in academic freedom. Making use of a new indicator and panel data covering 64 countries 1960–2017, we...     

Political rationality reconsidered: Notes on an integrated evaluative scheme for policy choices

This essay deals with the concept and problem of political rationality. Following the ancient conception that the absence or presence of rationality manifests itself in choice situations, we try to explore at first the specific characteristics of political choice, then turn to a discussion of the criteria for rationality, considering process, goal contents and structure criteria, point to the restrictions for rationality analytically inherent in any choice structure, and try in the end to make clear the difference between these analytical (i.e. principally unremovable) restrictions and the (principally removable) confining conditions (Kirchheimer) for rational political choices provided by the circumstances of present-day politics.     

Public policy and employee ownership: Designing economic institutions for a good society

While there are many types of economic arrangements compatible with democratic institutions and smoothly functioning markets, the predominant institutional arrangement in most marked-based democracies is one where the average employee has neither a share of direct ownership nor involvement in governing the company where he works. The substance of this essay deals with recent American attempts to redesign this arrangement, focusing specifically on the employee stock ownership plan (ESOP). The way we design the ownership of our economic organizations touches issues at the heart of practical political economy. It combines the realities of practice with visions of the good society. The challenge for lawmakers, then, is to think of employee ownership not only in terms of the technical details of public policy-making but as an institutional arrangement with wide-ranging potential implications for how we see and achieve the good.     

Further evidence on the relationship between economic freedom and economic growth

Much of the literature on the power of elected officials and bureaucratic agencies argues, from an empirical perspective, that bureaus appears to exercise autonomy. In this paper, a theoretical model sets out the conditions under which the Congress, the President, and one agency (we use the U.S. Federal Reserve as an extended example) can dictate policy outcomes. The results of the paper include the “Congressional Dominance” theorem: If more than 2/3 of House members, and more than 2/3 of Senate members, agree on something, they get it. The theorem is obvious (the “proof” is in the U.S. Constitution), but often forgotten in the substantive literature. More realistic results are derived for situations where the preferences of members of Congress are more diverse. Powers of the President to influence policy with, and without, appointments are also analyzed.